Estonia/Virginia

2013/7/31

Continuing a five-year partnership, the Virginia Credit Union League recently hosted two representatives of Estonia's credit union system for a weeklong internship that included discussions on credit union regulation and operations.

The Virginia Credit Union League and the Estonian Union of Credit Cooperatives (EUCC), a trade association now representing eight credit cooperatives (credit unions), signed a partnership agreement in 2008, through World Council of Credit Unions' International Partnerships Program.

World Council is the international trade association and development agency for credit unions and its International Partnerships Program connects credit unions and trade associations from more than 20 countries, facilitating the exchange of ideas, best practices and technical expertise.

As part of the partnership, delegates from Estonia have visited Virginia-based credit unions for a first-hand look at the operations, lending, marketing strategy and governance of U.S. credit unions and worked closely with the Virginia League on a number of key concerns, including technology, regulatory and legislative issues.

The League enlisted the aid of three credit unions - BayPort Credit Union, Fairfax County Federal Credit Union and UVA Community Credit Union - to provide educational opportunities on issues of interest to the Estonian visitors. All three credit unions are represented on the League Partnership Committee that coordinates our work with the EUCC. These credit unions provided an overview of their lending operations, marketing strategy and public relations initiatives.

Representatives of the League and its Partnership Committee have on three occasions visited Estonia and look to return in May 2014 for meetings that could include "credit unions" from the other Baltic nations of Latvia and Lithuania.

The Virginia League's service corporation is the majority stockholder in Baltic Shared Services, a company formed in 2010 to establish a clearing system to provide credit cooperatives in Estonia, and possibly elsewhere, with access to the central banking system in Eastern Europe. With such access, credit cooperatives will be better positioned to offer checking, ATM and card services, and eventually expand into online banking.

"Estonia's financial services market continues to be dominated by large Scandinavian banks, but we're proud to see the progress that the nation's credit cooperatives are making in building brand recognition," says David Miles, senior vice president of the Virginia Credit Union League. "Being part of the cooperative movement brings with it an obligation to ensure our movement grows and prospers, and Virginia's credit union system is proud to partner with World Council in helping reestablish cooperative financial institutions in Estonia."

A nation of 1.3 million people, Estonia had a thriving system of credit cooperatives prior to the Soviet occupation of 1940. At its height in 1939, the Estonian movement boasted 184 financial cooperatives and had a 52 percent market share. Credit cooperatives were again legalized once Estonia regained independence in 1991, after the collapse of the USSR. The first new Estonian credit cooperative was formed that same year.

Today, the Estonian movement boasts 21 credit cooperatives and $18 million (USD) in assets, according to World Council, and the nation's credit cooperatives are enjoying greater popularity, notes Tartu University Credit Union CEO Erki Pisuke, who along with his wife, Kornelika Egers-Pisuke, participated in the weeklong internship with the Virginia League.

Pisuke, who also now serves on the board of the EUCC, noted that Estonians are beginning to recognize the benefits of banking with credit cooperatives, despite significant issues, including the lack of deposit insurance, taxation, the inability to access the central banking system or safeguards on how organizations are able to operate under the "credit cooperative" name.

His own credit cooperative has grown rapidly in the past year after expanding operations to Estonia's capital and largest city, Talinn, and is fast approaching $8 million (USD) in assets. Most of the nation's other credit cooperatives are tiny rural operations, focused on agricultural loans.

He and other members of Estonia's credit cooperative movement are self-publishing newspapers and using regular television appearances to highlight the benefits of credit cooperatives, chief of which is that credit cooperatives are an integral part of their communities, with deposits and "profits" being reinvested in the community and being used to respond to members' needs. This is in sharp contrast to the Scandinavian banks that dominate the nation's banking landscape. They send profits back home, and as Pisuke notes, use various measures to avoid paying taxes in Estonia.

Key for Estonia's movement is access to the European central banking system, says Pisuke, who notes that Estonia is one of Europe's most-wired nations and most citizens are completely comfortable transacting business online.

In a fortunate twist, Estonians' comfort with e-services is driving large banks to abandon their sizeable branch networks, a recent trend on which the nation's credit cooperatives hope to capitalize.

"Although we are very much a 'wired' nation, we are finding people have a real interest in visiting a physical branch," says Pisuke. His credit cooperative's marketing efforts seek to exploit that interest in doing business locally and face-to-face.

Two important questions now face Estonia's credit cooperatives. Firstly, can they grow large enough, quickly enough to take advantage of Estonians' growing interest in supporting local business and big banks' desire to shed their large branch networks?

"The reality is we must grow larger to be truly viable and offer the mix of products and services that people expect," says Pisuke. "For us, it's less about the number of credit cooperatives in Estonia and more about growing our existing institutions so we can compete."

This second question makes the Virginia League's participation in Baltic Shared Services all the more important, as Estonia's credit cooperatives seek to level the playing field with big bank competitors in terms of product and service offerings.

Product innovation and marketing will carry the Estonian movement only so far, argues Pisuke. "Eventually, we will need to compete with the large banks in offering transaction services."

During the five-year partnership, the Virginia League has worked closely with its counterpart, the Estonian Union of Credit Cooperatives, on the regulatory issues surrounding access to the central banking system. The first step is creating a technology platform, through Baltic Shared Services, that facilitates access to the central banking system. This effort is also being aided by CO-OP Financial Services, now a minority shareholder in Baltic Shared Services,and an invaluable partner that brings far-reaching technological expertise to the enterprise.

"The credit union movement prides itself on leveraging our cooperative spirit in service to our members and we're excited to see this playing out in the Baltics," says Sarah Canepa Bang, president/CEO of FSCC, LLC, and Chief Strategy Officer of CO-OP Shared Branching. "CO-OP Financial Services believes credit unions are vehicles for spreading democratic principles and economic empowerment. We were eager to provide our support and technical assistance in helping Baltic Shared Services develop a technology solution that will allow credit unions to expand their services and better meet member expectations."

In addition, the EUCC is working to secure for its members waivers to stringent capital requirements for accessing the central banking system.

"In the past five years, Estonia's credit cooperatives have made tremendous progress, thanks to passionate people who truly believe in the cooperative model, and all in the face of truly significant challenges," says Virginia Credit Union League President Rick Pillow. "I'm proud that Virginia's credit union system has been able to play a role by providing funding for a key technology and operations initiative, and by sharing our insights on chartering, regulatory and legislative issues. I think the future holds tremendous promise for the Estonian system. Our goal now is to ensure they are able to leverage technology to better compete in the marketplace and build on their growing reputation as 'local' institutions committed solely to the success of their members and their communities."